CHAPTER7 - CHAPTER 7: REPORTING AND INTERPRETING COST OF...

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Unformatted text preview: CHAPTER 7: REPORTING AND INTERPRETING COST OF GOODS SOLD AND INVENTORY 1. Inventory Equation — Merchandising firm INVENTOK‘I “’1‘, — WNth " " QAZJJLIFU'Aa-L "l."_.'-n¢..z_.;. E WEE-“12L; ' 'I . -..._.—_, .5'. 5..me .—.¢.i‘;‘_££( El MMMMM firm, Pwmms _.—-——-————--——'1='———-——_-—_—. Grab/{NH San/ES .. bit-1 '65 «1:53 I'll—1' .u- hgzuemaée mew: . fink-z" 5'3:sz Melee? Beginning inventory (prior period balance sheet) + Inventory purchased and/or produced Cost of goods available for sale ~ Ending inventory (current period balance sheet) Cost of goods sold (current inoome statement) CHAPTER 7: REPORTING AND INTERPRETING COST OF GOODS SOLD AND INVENTORY Inventory Equation — Merchandising firm leeN’fiM mag-m1) '"WJEEJiW-‘d: 1. MmNMlNH 0m. g 0051 H 6mm 9M '"PMMMW 9 GNMNR Mm QKLMWMSINM ’ -- on” air (war; Mmum-mwp Nth/Niki; _‘, ": '. affix! .. 451%.! Beginning inventory (prior period baiance sheet) + Inventory purchased and/or produced Cost of goods available for saie — Ending inventory (current period balance sheet) I Cost of goods sold (current inoome Statement)? iuvfiNToiK‘i x, " Alix ~i~1 games w MAW/M xx +- 0049 Nv 1 iNuQNWM Mv 2. Inventory Costing Methods — Need for a Cost Flow Assumption examine: ,.‘.‘.h_ h.“ H ‘ .._ I, _ ‘.y _; “25": Invenwry on January 1. 2009 . . . . . . . . . . . . . o . . . . 500 unils a $100 pet unit 5 50.000 Inventory pwchased In 2009 . . . . . . . . . . . . . . . . . . 200 unus @ $160 pet unit 30.000 Total cost of goods nvatlabba for sale in 2009 . . . . . 700 uniis $ 80.000 Invamory sold in 2009 . . . . . . . . . . . . . . . . . . . . . . . 450 units @ $250 per unit $312.50!) f... .. .- ., . -.,7.;-.:..,. Beginning Inventory "a... Inventory Acquired (ftcm pains period balance than!) 5“ llrum outrun! polled pm or production) swam» IT‘S é Mm WIS h’fflfisgigfit. e. ' "-~*‘i¢d3~‘fiu§§§‘o ? 2 ‘RE' “my; ’ GOD 5.: I .u'E .‘r..|.. ,' . :V 1 1' 'v" -" - .. '. I :h{fflram-ai‘kmhmz2a: ‘ $51,..n- ’ ‘. I" . S u u. rm: 1 Ending Inventory Ra, Cost of Goods Sold {to martini pudod balance ahaeljo T (In ounonl patiud income stale:an MOWNYECFE. . étfguu‘n’5@ Four Possible Assumgtions: a) Specific identification Method b) F irst-in, First—out (FIFO) 0) Last-in, Last-out (LIFO) d) Weighted Average Cost (AC) Nona/rue” A’Sa—sti’fioNé (We \NbethENf or- Tm: MTMW I’H‘IEIGA‘L meiz P—Z: Eli-27. Applying and Analyzing Inventory Costtng Methods {L021 At the beginning of the current period. Chen carried LOGO units of its product with 1: unit cost of $20. A summary of purchases during the current period follows: . ' Units ' ’u'riit cam" ‘ Cost Beginnan inventory . . . . .. 1.000 520 $20,000 Purchases: #1 . . t . . . . . . . . 1.800 22 39.900 #2 . . . . . . . . . . . 800 26 20.800 03 . . t . . . . . . . . 1.200 29 34509 , than 13.5 AVa’élL-WQW Ritz. a»an WIN“ “35 39W During the current period. Chen salami) un ts. ’ eN‘MN‘fl kw. 0. Assume that Chen uses thefirshin first-out method. Compute both cost of goods sold for the ' ‘ “M “1 current period nnd the “Hing inventory balance. Use the financial statement effects template to record :05! of goods sold far the period. 1:. Assume that Chen Uses the last-in. first-out method. Compute both con of goods sold for the current period and the ending inventmy bttlnncc, t‘. Assume that Chen Uhcs Ihc average cost method. Compute both cost or good< sold for the current period and the ending inventory balance. (1. Which of them: three inventory costing methods would you choose to: l. Reflect what is Whitny the physical flow of goods? Explain. 2. Minimize income mates: for the planed“! Explain. 3. Report the largest amount of income for the period? Explain. witFO / COQS -— 2,9:2-0 VtNt-t’s two Whitth @ arm v 31mm tErO MiTtCé Qint, - 3“th W M who “WW ENblNH \NVENWR‘I "' 2.01m lAmTB 9W Wows. @ gm. ‘ $1.0,9W hum \AN\T3.@ $2.01 3 and?” WW 3 $5,501) b. Lula 5/ CW” “ 29W W»:sz "W0 mun @ $1M « swan W0 \ANH-sQ $24, . 1.0mm 3W) UNIT: @g'l'b .. WWW 19m) 'l'b,z.ro EMMNO‘ \NN u. 1m W\n \W’O {Amvn @¢?;L -. H-WO am mmw @; $2.0 m,m glam Wowswmg bdrm UH) '. em; W M MAN‘PWLfic'i‘Ejs wwwm L\M-LM5R, . @Nm \Ag mm; WANM? Lama, Q“ 0' Mequ mm” Memop 9%? 4L: tnLme’i’E MaKAME oom/ wm'r ; MST 9F bawbs Mmmrsm Perk JALE awn AVAWAflW» Fm. SALE: .; fiusnm—o ' a, gw/ 49W LAle STE? 1 ~. 000W 8 2.83313 x. § LL? f kmuhfl 3NMML, \Nu » lwwmur uaqwmo \\A. l. WHY;qu FW‘N “ FWD 1-meMne kNwME {wig Wham? 00:45 “a; WWEST 1m: ,3? Lowem (was. Vlme METH 9P7. LAT—o So, \M A fawn» M» msmo. ?K\UESL\N§LLAVWNWKY VeMoj)’ [AM «a fi‘ mung «9 LN: A» xfiyms A??th me +2 um (AMWRMWW Raga-«us C use MPO fiwu Tm. karma; .4? 1.1»an MLE MW 96%. @mmNmA-L Ka?a&fima. alvNL u, NVH ‘30 MW“! MMWMWS. \N Twig, w; “553: Lwo 3. Hmuas‘f \MUBME. N A Who» 9?- Rxsmm Wflww's w? “90 -—?J/Czofits—9‘T‘NI .—x,.. e Mom-Tam F1KMS WE FiPo- WHY? oSQME 0mm Hng we mm M. WELL7,HW1 t a TM; Wat ’E‘MNMA N A WNW 0“- Rama Moss . Longs , fikas kRE NM mama, Taxes — Ne w: leNTNE To use MFG Summary of LIFO/FIFO effects: increasing Gusts: Manna! Financial Sta‘teema nt Effects F.an ' urn East of goods sold an income statement Lower Highar Net income Higher Lower Income taxes ' Higher Lower Inventary' an balancé sh eat Higher Lower Decreasing casts: Normal Financial Statement Effects FWD um Cost of 901365 said an innnt statan‘uent Higher Lamar Net income - ‘ Lower Higher lincoma taxes Lower Higher Envanmny on balance sheet Lower . Higher 3. Lower of Cost or Market CISCO’s Inventory FN: Inventories. Inventories are stated at the lower of cost or market. Cost is computed using stan- dard cost, thEtiTppir—mtimates actuat cost, on'a' first-in, firstz'oo—Jt basis. The Company provides inventory write—downs based on excess and obsolete inventories determined primaril_y_‘by future demand forecasts. The—write down is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and Charged to the provision for inven- tory, which is a component of cost of sales. At the point of the loss recognition, at new, lower—cost basis for that inventory is established. and subsequent changes in facts and circumstances do not lt— result in the restoration or increase in that newly establisned cosfbasis. / ; Companies must write down the carrying amount of inventories on the balance sheet [fthe reported cost (using FIFO, for example) exceeds market value (determined by current replacement cost). This process is called reporting inventories at the lower of cost or market and creates the following finan— cial statement effects: Inventory book value is written down to current market value (replacement cost), reducing inven- tory and total assets. Inventory write~down is reflected as an expense (part of cost of goods sold) on the income state- ment‘ reducing current petiod gross profit. income, and equity. Cow. xx \Nvimto m xx 60M?qu @wo 99M warm UHRRM. Bowie Hwa ’3?) Mafia Am A’fifusTMEN’rs ’Fo Mama 1M9 MM‘PHS. MERN\NL1PLM_?. ‘ies- UFO/mm (News «W‘s. eracT 0N . (Lear/:9 waif-{s . Embmq \N‘uamow ... Ms \N um, um Raw, HWE ’H’o btsom$£ Abwflowm '«Npo _, MW Kauai: WW Law «A? VHFD 4. LIFQ to FIFO Conversion (506ng$0 : M 4r Mm ?WMMES » Emit” .... (9 HM . > P ,. ‘ v MMMM u. BBMM “’r New FWHASbs ,. EELEFE Rams“qu w W) ENMNQ “W W RESMVE EN — hm: UHF—'0 MW 3: v” W4” / 1/1; PM 9-H 30, FIFO inventory a LIFO Inventory + LIFO Reserve This mlallou also impam cm: of goods sold {COOS} m; foliows: F1131) EGGS = UFO C0118 - Increase In MFG Reserve {or + Decrease} 000$ \ASFA MPO HARLEY-DAVI$SON, INC. ! Notes to Consolidated Financial Statements 2. ADDITIONAL BALANCE SHEET AND CASH FLOWS INFORMATION 1 (In thousands) .- _-.... _._~-4._._._..- ._. - . .7 .. my».-. 2008 2007 Inventories: Inventory at FIFO " 441.042 381.831 Excess of FIFO over LIFO cost 40,134 32.134 Inventory :1! LIFO $400,908 3349.697 ._.__ ,._....___._._...__ .._W.....__.__.w“..__.._. ....__.J / = gum. - hm (DAN M QMLWLM€> Financial Statement Effecl: of Inventory Costing Methods Tfifii L s v” - u DAVIDSON. Annual Report LIFO Reserve Invenlory reparlcd on live balance .s‘heel marshy 5. LIFO Liquidations The increase in gross-profit, resulting from a reduction of inventory quantities in the. presence of rising costs is called LIFO Liquidation. (a) Year z—No UFO Liquidation (purchased same or greater number of units than sold) -._ Example,- Threo units purchased and (Ines units sold —. ~ STEP 1 STEP 2 Inventory Flows— MQCHANDISE 51w, MERCHANDISE Year 2 PURCHASED SOLD Units Purchased % x: ._ ,. - Cost Of .“t run-hrs? 9120:. goods sold 1 $360 Purchs es $3???” $3603 $120: ' Goods available for $30 - sale $580 $80 Beginning ' 'i' . ENUI'HQ inventory $70 $70 Inventory Sales revenue $420 $220 :7 " 1""; =:::- :m:- :='.-x'r @20 cos! of goods 501d 360 $70 $70 ' Gross profit g 60 (b) Year 2—LIFO Liquidation (purchased fewer units than sold! Example: 7M units purchased and three units sold STEP 1 STEP 2 MERcl-IANDISE W mammals: Units PURCHASED saw urchased _ ummw p ‘ ' % $126 .4 new”: _,. n n. _ Cost of ' $120 ,. $120 goods sold * ' $320 t?:m*=:=".-2~,-:; .. $1263” 580 ‘ I Goods ' $80 available for - - — ~ >- sale $460 fifiggpfi $70 Sales revenue $420 $220 .. $70 . Cost of goods sold 320 Maggy Gross profit £100 $7” ' 57° $14ory How Wu 1% \NUMEPQE mum PMHr’l’o THE MM? “N NOT Vvuwnvqu ANV Mum's. MkaMSJ Put—n? 10 S’A U23 3* “FLO COMS (Moira) PM) “0 AMS) Punt-v? "4? in Example: Mink A senxes 0t: nummmut wssM Several years agokGeneml Motors reported the following in its inventory note: The cost of substantially ail domestic inventories was determined by the last-in, first-out (LIFO) method. If the firstvin, firsmut (FIFO) method of inventory valuation had been used by the Corporation for US. inventories, it is estimated they would be $l.886.0 million higher at December 31 [Current year] compared with $2,077.! million at December 31 [prior year]. As a result of decrcn .. 11d "0' i0" In min LIFO inventory gunntities carried at lw oats prevailing in prior ears, as with the costs of current Eurchnses, were liguidnted. . . . These inventog adjustments favorabl! ut‘feeted income (loss) before income taxes by approximately $305.0 million [current year]. In the current year. GM recorded a small pretax operating profit of $228 million. WtTHWT Ltr—o HQMJ'DPffioN _ tam mime) HANS ? SHONN A Loss 0F Benn-0-1.1.9: 3191-10 ll 6. Income Manipulation under LIFO in period of falling prices P—4: Analyzing and Interpreting Income Manipulation under the LIFO Inventory Method (PM) Peterson Products sells specialized mountaineering equipment that it acquires from an outside source. During the year 2011. the inventory records reflected the following: Units Unit Cost Total Cost 16 $12,500 $200.00!) 45 10.100 454.500 Beginning inventory Purchases Sales (50 units at $24,700 each) Inventory is valued at cost using the LIFO inventory method. Required: 1. Complete the following income statement summary using the LIFO method and the periodic inventory system (show computations): Sales revenue Cost of goods sold Gross profit Pretax income Expenses 400,000 $ Ending inventory 3 2. The management, for various reasons. is considering buying 20 additional units before Decem- ber 31. 2011, at $8.600 each. Restate the income statement (and ending inventory). assuming that this purchase is made on December 31, 201 l. 3. How much did pretax income change because of the decision on December 3|. 201 1? Assuming that the unit cost of equipment is expected to continue to decline in 2012. is there any evidence of income manipulation? Explain. \‘L. (Legit 9M3 Kaqekme 000‘s (’0 (45x N‘W‘D "l’ SX muss YMHT emeseS run) PM: —TM< Name 3M5 Neme 00% s (7.) (IOXOAW + 30 xmmro) mum Pneu- 6(9st PM 4'de mm M \‘5 “as, m 5V], m ‘1\€.vW_ 4WIW as, m l.‘L$§1W’O 4-13,“;‘0 .160] m +ro ,o-xm 360,,onrv ‘1- INVENTON Emu ‘Exmvvwx ’Lmo: \ENMNLI \lemnm \; WELSTAWD m1 hm um , 7.0m. -. Limmmo. \NueNToM \; Com/601' \NHM \s \NPMA' M “(ma \NVCNWM mm» W NET Mum; IN Low, Lou. & ZQIL-7. 14 ...
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This note was uploaded on 09/06/2011 for the course UGBA 102A taught by Professor Udpa during the Spring '07 term at University of California, Berkeley.

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CHAPTER7 - CHAPTER 7: REPORTING AND INTERPRETING COST OF...

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